Canadian COMPETITION LAW

November 10, 2012

Derek Ireland (djirel@sympatico.ca) has recently presented a new paper to the Canada Law and Economics Association entitled “Behavioural Economics and Competition Policy and Law in Emerging Market Economies”.  Abstract:

“The literature on how behavioral economics should be applied to competition policy and law in the more advanced OECD economies has expanded greatly over the last ten years.  However, behavioral economics and antitrust have to date not addressed the obvious relevance of these behavioral insights for the design and enforcement of competition policies and laws in the more than 80 emerging market economies that in the past 20 years have established new or more modern competition policies, laws and authorities. The purpose of this working paper and our research program is to make a modest start to filling this research gap. 

The major argument of this working paper is that selective application of the insights from the behavioral, information and related literatures will improve the analysis and decisions of emerging economy competition authorities, reduce the risk of Type I errors/false positives (e.g. blocking a good merger) and Type II errors/false negatives (e.g. clearing a bad merger), and enhance the competence, credibility and visibility of new, recently established and other competition authorities in emerging economies. 

One of the guiding principles from the research is that behavioral economics and related literatures must be able to reduce both Type I and Type II errors in order to be helpful to inexperienced and under resourced competition authorities in emerging economies.  On the positive side, emerging economy competition authorities, enterprises and other economic agents operate in a world of rapid change, complexity, ambiguity, and unpredictability.  When: (i) the complex objectives functions and the management challenges of business groups and other companies are brought together with; (ii) aversions to risk, losses, disappointment, complexity and ambiguity and to making difficult decisions in complex market contexts; enterprises more often employ simple decision rules and strategies and other heuristics and shortcuts. 

“Simple, fast and frugal” decision rules and heuristics tend to favour pro-competitive conduct and outcomes compared with higher risk anticompetitive strategies that are more information and analysis intensive.  Under these circumstances, applying the insights from behavioral and related literatures can reduce the risk of blocking an efficiency enhancing merger, dominant position, vertical arrangement and other Type I errors in an emerging economy. 

The negative side becomes more evident when bounded rationality, behavioral biases and information asymmetries are “refracted through” the competition related attributes of emerging economies such as: small, fragmented markets; government interference in the economy; high and enduring entry and exit barriers; and underdeveloped financial and other markets, market institutions and enterprise sectors. 

Under these circumstances, predation, entry deterrence, non-horizontal mergers, and other questionable competitive conduct and trading practices, that would not raise competition concerns in the OECD economies, would more often cause substantial harm to competition, consumers, efficiency and national economic performance in emerging market economies.  The “refraction” process as well indicates opportunities: for smaller competitors to possess and exploit market power through unfair trading practices, political connections, and institutional gaps and voids; for “irrational” predation and other anticompetitive conduct to be “rational” and harmful to competition and consumers; and, for “irrational” predation and other anticompetitive conduct to cause substantial harm to the competitive process and consumers. 

For these and other reasons, the insights from behavioral and related literatures would reduce the risk of approving an anticompetitive merger, dominant position, non-merger vertical and horizontal arrangement and other Type II errors. 

The challenge for this working paper and research program and for competition authorities in emerging economies is to identify which insights and their implications for market structure, business conduct and competitive effects are most relevant to a specific market and national context, competition policy issue and competition law enforcement case.”

For a copy of the paper see: Derek Ireland paper – Behavioural Economics and Competition Policy

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